Mancur Olson Archives - the patient investor

July 2, 2019August 27, 2019

The Long Game: Why the West is losing

Autocracies like China, Russia and Iran are challenging the dominance of Western democracies. Much has changed in the last two decades, fueling this emerging threat to the free world.

China & Global Trade

China joined the WTO in 2001 and disrupted global trade. Subsidy of state-owned or state-sponsored industries tilted the playing field. Manipulation of exchange rates, amassing $4 trillion of foreign reserves, helped to depress the yuan, creating a further advantage for Chinese manufacturers.

Manufacturing employment in the US shrank by more than 5.5 million jobs between 2000 and 2010.

Manufacturing Jobs USA

Europe experienced similar losses.

Manufacturing Jobs UK, France & EU

Output recovered, but through a combination of automation and offshoring labor-intensive activities, manufacturing jobs were never restored. Losses of 4 million US manufacturing jobs (23.5% of total) and an equal 4 million (10%) in the European Union appear permanent.

Manufacturing US & EU

The Global Financial Crisis

The global financial crisis (GFC) in 2008 and the recession caused soaring unemployment and further alienated blue collar workers.

Unemployment US & EU

The $700 billion bailout of the banking system (Emergency Economic Stabilization Act of 2008), with no prosecutions of key actors, undermined trust in Federal government.

The Rise and Decline of Nations

Mancur Olson, in The Rise and Decline of Nations (1982), argues that interest groups — such as cotton-farmers, steel-producers, labor unions, and banks — tend to unite into pressure groups to influence government policy in their favor. The resulting protectionist policies hurt economic growth but their costs go unnoticed, attracting little resistance, as they are diffused throughout the economy. The benefits, on the other hand, are concentrated in the hands of a few, incentivizing further action. As these pressure groups increase in strength and number, the costs accumulate, and nations burdened by them fall into economic decline.

Olson formulated his theory after studying the rapid rise in industrial power in Germany and Japan after World War II. He concluded that their economies had benefited from the almost complete destruction of interest groups and protectionist policies as a result of the war and were able to pursue optimal strategies to rebuild their economies. The result was that their economies, unfettered by pressure groups and special interests, far outstripped those of the victors, burdened by the same inefficient, protectionist policies as before the war.

Federal government, choked by lobbyists and special interests, failed to prioritize issues facing blue collar workers: global trade, off-shoring jobs and fallout from the GFC. Formation of the Tea Party movement in 2009 created a rallying point for libertarians and conservatives — supporting small government and traditional Judeo-Christian values¹ — but it also opened the door for populists like Donald Trump.

Polarization

Exponential growth of social media, combined with disinformation and fake news, has polarized communities.

In 2017, 93 percent of Americans surveyed said they receive news online, with news organization websites (36%) and social media (35%) the most common sources. Trust and confidence in mass media has declined from 53 percent in 1997 to 32 percent in 2016, according to Gallup Polls.

Politics are increasingly dominated by outrage and division, with populist candidates gaining handsomely.

Many Western governments are now formed of fragile coalitions. Greece, Italy, Germany, even the UK. Others in Eastern Europe — Poland, Hungary, Austria, Turkey — are heading towards autocracy.

The Long Game

China has been quietly playing the long game. Massive investment in infrastructure, subsidy of key industries, controlled access to its markets, upgrading technology through forced partnerships with Western companies in exchange for access to Chinese markets, and industrial espionage have all been used to gain an advantage over competitors.

The CCP exploits divisions within and between Western governments while expanding their influence in universities, think tanks and the media. The stated aim of the CCP’s United Front Work Department is to influence Chinese diasporas in the West to accept CCP rule, endorse its legitimacy, and assist in achieving Party aims. This includes some 50 million who emigrated after 1979 or are PRC students studying abroad. Stepped up surveillance of PRC students, funding of Confucius Institutes on campuses and growing student activism has raised concerns in Australia over academic freedom and promotion of pro-Beijing views³.

Western governments seem unable to present a coordinated response. Absence of a cohesive, long-term strategy and weakened alliances make them an easy target.

Pressure Groups

Governments are also subjected to pressure from within. The latest example is pressure exerted, by US companies, on the White House to lift the ban on sales of US technology to Huawei. From the New York Times a few days ago:

Beijing has also pressured American companies. This month, the Chinese government said it would create an “unreliable entities list” to punish companies and individuals it perceived as damaging Chinese interests. The following week, China’s chief economic planning agency summoned foreign executives, including representatives from Microsoft, Dell and Apple. It warned them that cutting off sales to Chinese companies could lead to punishment and hinted that the companies should lobby the United States government to stop the bans. The stakes are high for some of the American companies, like Apple, which relies on China for many sales and for much of its production.

Short-term Outlook

The problem with most Western democracies is that they are stuck in a short-term election cycle, with special interest groups, lobbyists for hire, and populist policies targeted at winning votes in the next election. Frequent changes of government lead to a lack of continuity, ensuring that long-term vision and planning, needed to build a winning global strategy, are woefully neglected.

Autocrats like China, Russia and Iran are able to play the long game because they enjoy continuity of leadership. They do not have to concern themselves with elections and the media cycle. They own the media. And elections, if held, are a mere formality, with pre-selected candidates and pre-ordained results.

Western democracies will have to adapt if they want to remain competetive in the 21st century.

Focus on the Long-term

Switzerland is one of the few Western democracies that is capable of a long-term focus. Their unique, consensus-driven system ensures stability and continuity of government, with buy-in from all major political parties. The largest parties are all represented on the 7-member governing Federal Council, elected by Federal Assembly (a bicameral parliament) for four-year terms on a proportional basis. There has been only one change in party representation on the Federal Council since 1959².

Cohesiveness and stability provide a huge advantage when it comes to long-term planning.

Conclusion

Regulating global trade, limiting the threat of social media, ensuring quality journalism, protecting academic freedom, guarding against influence operations by foreign powers, limiting the power of lobbyists and special interest groups — all of these require a long-term strategy. And buy-in from all sides of the political spectrum.

We need to adapt our current form of democracy, which has served us well for the last century, but is faltering under the challenges of the modern era, or risk losing it all together. Without bipartisan support for, and commitment to, long-term policies, there is little hope for building a winning strategy.

The choice is ours: a highly-regulated, autocratic system where rule of law is the first casualty; a stable form of democracy that ensures long-term continuity and planning; or continuation of the present melee, driven by emotion rather than forethought, populist leaders, frequent changes in government — and subservience to our new autocratic masters.

Footnotes:

Wikipedia: Tea Party movement
Current Federal Council representation is 2 Free Democratic Party (liberals), 2 Social Democratic Party (social democrats), 1 Christian Democratic People’s Party [CVP] (Christian conservatives) and 2 Swiss People’s Party [SVP] (national conservatives), reflecting 76.2% of the popular vote in 2015 Federal elections. The SVP gained one seat from the CVP in 2003.
The Diplomat: China’s United Front work – Propaganda as Policy

December 7, 2012

Mancur Olson | The Economist

Mancur Olson’s 1998 obituary from The Economist sums up his beliefs as to why Germany and Japan made such startling recoveries after WWII while Britain, one of the victors, floundered.

The conclusion was striking. Narrow, self-serving groups had an inherent, though not insuperable, advantage over broad ones that worry about the well-being of society as a whole. How might that insight explain the fate of nations? In 1982, in “The Rise and Decline of Nations”, [Mancur Olson] offered an answer.

In any human society, he said, parochial cartels and lobbies tend to accumulate over time, until they begin to sap a country’s economic vitality. A war or some other catastrophe sweeps away the choking undergrowth of pressure groups. This had happened in Germany and Japan, but not in Britain, which, although physically damaged in the war, had retained many of its old institutions. Surely there was some less cataclysmic route to renewal? Yes, said Mr Olson, a nation’s people could beat back the armies of parochialism, but only if the danger were recognised and reforms embraced.

Read more at Mancur Olson | The Economist.

December 7, 2012

Jack Kemp Showed GOP How to Appeal to Minorities

Bruce Bartlett writes that late senator Jack Kemp is a role model for how Republicans should engage with minorities:

Although Kemp pushed for a cut in tax rates for the wealthy, he was adamant that all workers must share in the benefits of lower taxes. He also focused heavily on the idea that saving, investment, technological advancement and capital formation were the essential goals of economic and tax policy, because they raised productivity, which would raise the wages of workers. Today, Republicans just blithely assume that tax cuts for the wealthy will automatically help the economy without ever explaining how or why.

The key to a thriving capitalist system is a successful partnership between capitalists and labor. Capitalists benefited hugely over the last half-century from jobs the private sector created — and from rising wage levels — through growing consumption. Without consumption they would fail. Workers on the other side of the bargain have also benefited from job creation and rising wage levels. Without them they would suffer unemployment and genuine hardship. Neither side can afford to focus on their own needs without recognizing the importance of the other’s.

Mancur Olson argued that specialized unions with narrow membership will attempt to optimize benefits to their members, be it airline pilots or sanitation workers, even if this achieves a sub-optimal outcome for the economy as a whole. In other words, they will advance their own interests at the expense of others. But he also argued that broad-based unions will not, recognizing that they cannot advance their own members’ interests if the economy as a whole suffers.

I believe the same applies to capitalists. Monopolies or cartels who attempt to maximize their own profits will damage the economy, while broader-based groups will recognize that they can only maximize profits by advancing the economy as a whole — creating new jobs and lifting wage levels.

You also cannot focus solely on lifting wage levels — as Herbert Hoover attempted in the early 1930s — in the hope that this will support the broader economy. Higher wages will slow job creation and retard the recovery. The focus has to be on maximizing the total wage bill — and consumption. At times, during a recession, this requires lower wages and more jobs. But as the economy approaches full employment, wages will rise while job creation slows.

Exporting jobs offshore may serve the narrow interests of some manufacturers but is ultimately not in their long-term interest. They may gain from cheaper labor costs but they are also exporting consumption, which will directly or indirectly hurt sales.

That Kemp was an extraordinary man is also borne out by his views on immigrants, emphasizing integration rather than exclusion:

I also know that Kemp had a far different attitude toward immigrants than virtually all Republicans today. He welcomed them, seeing immigration as one of the economy’s lifebloods. He would be extremely critical of efforts to demagogue Latino immigrants who come here, legally or illegally, just looking to earn an honest living and enjoy the American way of life.